Two of Kothari Pioneer Mutual Fund (KPMF)'s existing growth schemes --
Kothari Pioneer Bluechip Fund and Kothari Pioneer Prima Plus --
outperformed the markets in recent years, thanks to their substantial
exposure to infotech stocks. Buoyed by this stellar performance, KPMF
recently launched a growth scheme dedicated to the infotech sector. Kothari
Pioneer Infotech Fund (KPIF), the sector-specific fund, is the outcome of
extensive research of the infotech sector which has a bullish outlook.

Having mopped up Rs 8 cr from the market from nearly 4000 retail investors
through an initial issue last month, KPIF has already invested the funds in
infotech stocks. In fact, enthused by an encouraging response from retail
investors, it has decided to advance the commencement of the open-ended
scheme by a week to 7 Sep.'98 from 14 Sep.'98.

Capital Market's Sameer Purohit spoke to KPIF's fund manager, R Sukumar, on
the future investment strategy, reasons for optimism on the infotech sector
and how value can be found in infotech stocks. Excerpts :

What investment strategy do you propose to adopt for the infotech (IT)
fund?

We plan to invest a substantial portion of the portfolio in large
companies which have a robust business model, sound track record,
ability to manage growth, transparency and integrity. I expect a
steady appreciation in prices of these scrips. A portion of the
portfolio will be invested in smaller companies which have a good
chance of emerging as blue chips. Though riskier, these companies can
be potentially very rewarding.

What makes you optimistic about IT stocks?

Software stocks have performed dramatically in the last three years,
driven by a combination of high growth rates and better investor
awareness of the sector's fundamental strengths. I expect the sector
to outperform the market as it continues on its high growth path,
though at more moderate levels compared to earlier years.

Specifically, what are your reasons for optimism?

Number one is the projected high growth rates. Global demand for
computer services is growing at a fast pace. Due to vast requirements
and difficulty in managing operations, an increasing number of
corporations are outsourcing their IT requirements. Indian companies
are catering to this huge growing market. NASSCOM expects Indian
software exports to touch Rs 36,000 cr by 2002 from Rs 6,000 cr in
1997.

==================================================================
Bouncing back
KPMF's performance report for end-Aug.'98
==================================================================
Last Last Last Last Since
1 month 3 months 1 year 3 years Inception
===================================================================
Bluechip Fund NAV* -2.56 -9.68 27.01 6.08 26.06
Prima Plus NAV+ -2.71 -10.3 16.80 1.92 -1.17
BSE Sensex -8.64 -19.46 -25.61 -4.11 -2.29
Crisil 500 -5.17 -18.57 -19.94 -6.27 -11.68
* Started in Dec.'93 with an objective of investing in large
cap stocks, the scheme has consistently outperformed the
30-share BSE Sensitive Index.
+ Started in Sep.'94, the growth scheme had a severe setback
due to a substantial exposure in IPOs. The subsequent
restructuring of portfolio has, however, enabled it
to outperform Crisil-500, the broad-based index.
==================================================================

Second, India has the unique advantage of having a vast pool of
English-speaking IT professionals at lower pay levels. Unlike the
other sectors, the leading Indian software exporters have a track
record of high quality. Indian companies have built relationships with
a number of Fortune 500 corporations, which will allow them to expand their businesses.

Third, the high return on capital. The margins of software companies
are high and capital requirements relatively modest, thereby enabling
a high return on capital. Because of this, software companies are able
to achieve high rates of growth from internally generated resources,
thus reducing the need for equity dilutions.

Some are of the view that the current prices of IT stocks have already
factored in the growth projections. What is your opinion?

Valuations of IT companies have expanded in the last two years. But
the Lynch ratio (earnings per share growth/price earnings ratio) of
the Indian IT sector is favourable compared to the BSE-30 and similar
companies listed in the US. Also, in the US, the price earnings (PE)
ratios of IT stocks are much higher than the market because of higher
growth anticipated for this sector. I expect the current valuations of
Indian IT stocks to hold in the medium term, though they may contract
during periods of pessimism and expand during periods of optimism. If
the current valuations hold, then the stocks will perform in tune with
earnings growth which is very high. In the long term, when PE ratios
shrink, high earnings should compensate for this and the stocks will
appreciate substantially.

Aren't Indian IT companies providing low-end services? How will they meet
competition from China, Philippines and CIS countries?

We plan to invest in good quality companies which have already moved
up the value chain and are moving up further every year. These
companies stand to benefit from their established clientele and
systems. The only country in the above list which can be a major
threat in the long term is China. But Indian companies have a head
start and the good ones should maintain this. Also, demand for IT
services is growing and there is enough room for all.

Can you give examples of companies that have moved up the value chain?

Operating profit per employee (OPE) is a good measure of value
addition. Infosys has been able to increase its OPE steadily by
increasing the share of fixed bid contracts and branded services.
Wipro, too, has been adopting a similar strategy. It also offers
services in systems software for technology companies. Competition in
this area is limited. Satyam has reorganised its operations so that
specific groups can develop domain expertise in areas like banking
and manufacturing.

What will be the impact of the government's initiatives on the IT sector?

The package, when fully implemented, will help in a number of ways.
For one, Indian software companies need to become global. They need to
employ people in various countries. So stock options are required to
attract and retain talent.

Software companies use satellite links for data communication and it
is a major cost. Reduction in rates for dedicated links will give a
big boost to the sector.

To what extent will the falling rupee buoy the fortunes of the IT industry?

It will help because a higher dollar rupee exchange rate or a costlier dollar will go straight to the bottom line.

What are the sectoral risks ?

The most important risk factor is the ability to manage growth. The
sector is growing fast and organisations are becoming big. Managements
should have the ability to institute systems to manage this growth.
Some company managements are probably not equipped to handle this.

Another important risk factor is the relationship with G-7 countries.
Indian software exports are mainly to G-7 countries. Hence, any major
negative development in relationships with these countries can have an
adverse impact.

Moreover, competition for low-value services can come from countries
like China. Companies which do not move up the value chain may be
affected.

How do you plan to minimise the risks?

It has to be understood that the IT sector by itself is a multi-
faceted versatile industry with many segments that have their own
growth rates, dynamics and sets of markets. By exploring and investing
in different aspects of the IT industry, we should be able to achieve
a level of diversification within this sector itself and thereby
manage the risks.

Our research is focused on a number of qualitative issues like
business model, competitive strengths, strategy, personnel, system,
risks, etc. A lay investor may not have the inclination, time and
competence to gather information on these companies. Whereas, we have
been tracking this industry for quite some time. We do a lot of ground
work as no published report can give an edge in researching these
companies. I have at times spent days meeting different people of the
same company, which gives a much better overall perspective.

What is Infotech Fund's role in an investor's portfolio?

Since it is a sector-specific fund and does not provide the desired
levels of diversification, it can serve as a supplement or a booster
to an already diversified portfolio.